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China's economic growth cools to slowest since 2005

(Bloomberg)
Updated: 2008-07-17 19:25

As many as 45 million workers earn their livings in export-oriented sectors, according to Jonathan Anderson, a Hong Kong-based economist with UBS AG. He cites government surveys.

Inflation has eased from February's 12-year high of 8.7 percent on smaller gains in food prices. It remains above the central bank's 4.8 percent annual target and rising commodity costs may keep prices elevated.

Producer-Price Inflation

Producer prices climbed 8.8 percent in June from a year earlier, the statistics bureau said, after rising 8.2 percent in May. That is the fastest pace since Bloomberg data began in 1999.

"The high producer-prices number points to the potential risk of inflation in the coming months," said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. "Inflation is still way above the official target so a tight policy will continue."

Besides using the currency to cool inflation, China has imposed lending quotas and ordered banks to set aside a record 17.5 percent of deposits as reserves to soak up cash flooding the economy from trade, foreign direct investment and investors betting on gains by the yuan. The central bank hasn't raised interest rates this year to avoid attracting capital inflows.

Standard Chartered Bank Plc today cut its forecast for four interest-rate increases this year to none and said policy makers' next move will be to cut rates in 2009.

Retail Sales Soar

Government efforts to boost consumption at home may be paying off. Retail sales rose 23 percent in June from a year earlier, the fastest pace since at least 1999. Urban disposable incomes rose 14.4 percent to 8065 yuan for the first half from a year earlier. Rural cash incomes climbed 19.8 percent to 2528 yuan.

"The surprising thing is the strength of the domestic economy," said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong. "Consumers still have a lot of cash and in that sense it's difficult to be too pessimistic about the domestic economy."

Investment jumped amid rebuilding after the Sichuan earthquake in May. Urban fixed-asset investment surged 26.8 percent in the first half from a year earlier, the statistics bureau said, after climbing 25.6 percent in the first five months.

"They can keep the economy growing at 10 percent even if there is a sharp slowdown elsewhere in the world," said Julian Jessop, an economist with Capital Economics Ltd. in London, citing the government's ability to boost spending.

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